Retirement Planning for High Net Worth Investors

A digital tablet displaying a bar graph rests on top of a desk full of financial planning documents.

Retirement is far from guaranteed, even for high-net-worth individuals. There are still many threats to a high-net-worth retirement that can undermine your best-laid and most carefully constructed plans. In fact, many of these threats become even more menacing as your net worth grows, such as taxes and the risk of lawsuits.

At Rock House Financial, we work with a lot of high-net-worth individuals, and in our experience, there are 5 common threats we see that especially affect a high-net-worth retirement. We created this guide to help walk you through these threats as well as offer some tips on how to mitigate them.

Chapter 1

Taxes

Unfortunately, taxes don’t end with your working years. Anytime you receive income from your investments outside of a Roth account, you’ll need to pay taxes on that money. If you’re taking a lot of income, as many high-net-worth retirees do, and are pushed into a higher tax bracket, taxes can take a big bite out of your retirement nest egg.

There are a few strategies high-net-worth individuals can use to minimize the impact taxes have on their retirement income. 

First, having both pre-tax and after-tax income sources can help you control the amount of taxable income you incur each year. Ask your financial advisor to run tax projections for each year to estimate your tax bill and help you decide where you’ll draw your income from and if you need to adjust your withholdings. If you’re anticipating a large influx one year, such as from selling a house, you might withdraw extra income the year before so you don’t need to take it in a year that you’re in a higher tax bracket.

You should also investigate tax-loss harvesting strategies to help you minimize your tax bill. With tax-loss harvesting, you sell some investments at a loss and use that to offset any capital gains you incurred. The IRS allows you to offset up to $3,000 in capital gains with losses each year. If your capital losses exceed $3,000, you can carry the additional amount forward to offset future capital gains. This is particularly effective for short-term gains, which are taxed at a higher rate than long-term gains.

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Chapter 2

Inflation

An even more unexpected threat to your retirement than taxes can be inflation. It’s easy to forget about the impact inflation can have when you focus on the short-term, especially if that short-term is a very low-inflation environment. But the rising cost of goods over the long-term can considerably dampen the value of your retirement savings, especially for high-net-worth investors who likely want to provide the best possible future for themselves and their loved ones. Items like luxury goods, education and healthcare are all subject to inflation. Tuition and healthcare are particularly notorious for increasing at an even faster rate than inflation.

Traditional retirement investing strategies are to move the majority of your investments to safer, income-producing options like bonds when you retire, but bond yields seldom keep pace with inflation. To protect your portfolio from inflation, talk to a financial advisor about incorporating investments that can outpace the rising costs of the goods and services you plan to purchase during your retirement. This doesn’t mean you need to hold high-risk investments, but including some growth investments is important, especially given how long retirement can last. Try to strike a balance between preservation, income and growth in your retirement portfolio so you aren’t subject to excessive volatility but also won’t fall prey to inflation.

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Chapter 3

Market Volatility

Market volatility is another major threat to a high-net-worth retirement. The fact that you need to use growth investments to counteract inflation only exacerbates the risk to your portfolio of market volatility. The challenge for high-net-worth retirees isn’t how to avoid market volatility, but rather how to plan for it so you don’t have to adjust your lifestyle if the market takes a turn for the worse.

The trick to handling market volatility is to focus on the elements of your portfolio you can control. You can’t control what the stock market will do, but you can control how you invest and how much income you need to withdraw from your investments. This second layer is particularly important for retirees. The more flexibility you can build into your income plan, the better you’ll be able to weather market volatility, as you won’t be forced to sell as many investments when the market is down – the true risk of market volatility. Creating an income strategy to cover your necessary expenses with guaranteed income sources, such as Social Security and pensions, or investment income, such as rents or interest, will help you be better prepared for market volatility. 

Chapter 4

Life and Family Changes

Life and family changes before and during retirement can have a significant impact on your lifestyle. Divorce can particularly wreak havoc on an individual’s finances. High-net-worth individuals are also often at greater risk of lawsuits. Speak with a financial advisor to make sure your retirement assets are protected from both divorce and creditors.

Having adequate insurance can also help protect your retirement from unforeseen life and family changes. When an unforeseen change occurs, you want to make sure you and your loved ones are protected. This includes home and auto insurance as well as life and health insurance. You may want to build a large buffer into your plan for the cost of long-term care or consider purchasing a long-term-care insurance policy, because it’s nearly impossible to know exactly how much it will cost.

The biggest change that no one wants to address is death or disability, but these are factors high-net-worth individuals can’t ignore. Communication is key in planning for either of the above. Make sure your loved ones understand your wishes and intentions for your wealth, and make sure all necessary parties are aware of where the assets are held. Having a proper estate plan and legal protection is also key to planning for life and family changes. Having a financial advisor who includes estate planning and works with your attorney can help you have a full comprehensive plan to help you and your family be prepared for whatever life events might come. 

It’s not only the impact of your own health that poses a risk to your retirement, either. Many retirees find themselves caring for or financially supporting family members. This can put an additional strain on your retirement savings that, if not planned for, could put you at risk of running out of money. Your retirement plan should address the possibility that you may provide support or care to loved ones and incorporate strategies for how you can accommodate that without putting your own retirement at risk.

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Chapter 5

Special Considerations for Business Owners 

Business owners face additional threats to their retirement. The first is simply saving for retirement. Business owners often struggle to save regularly for retirement because they may have fluctuating income or what feel like more pressing financial concerns. And without access to a company-sponsored 401(k) plan, which automates retirement contributions, it can be easy to put off saving. A retirement saving strategy can also help you find tax savings.

The biggest threat to anyone’s retirement is being underfunded. There is little to nothing you can do if you reach retirement without enough savings. If you’re a business owner, make sure you prioritize retirement savings from the outset.

Many business owners unfortunately relate their retirement directly to their business. The thought is they’ll simply sell the company to generate a nest egg. But think twice before committing to this strategy. There is no guarantee what the market will be willing to pay for your business when retirement comes. While it’d be great if you could sell your company for enough to cover your retirement costs, counting on this to happen is akin to putting all your eggs in one basket. What if your target retirement date comes in the middle of a bear market? Do you put off retirement until the market recovers? Do you sell for less and settle for a smaller retirement lifestyle? Talk to a financial advisor about using a strategy that includes multiple income streams so your retirement lifestyle doesn’t hinge on only one.

You should also talk with a financial advisor if your business is a large asset and big portion of your retirement plan. It is important to do the proper planning around such a valuable asset. For example, having the right insurance and legal protection on the business is an important part of risk mitigation for your financial plan. You should start early in developing an exit plan for retirement to help you get more value out of your business. 

Another unfortunate reality for many business owners is that the income streams many workers rely on most heavily in retirement, such as Social Security, may not be as generous for them. Often, business owners take advantage of write-offs during their earning years to reduce taxable income. But this leaves them with lower reported income for the Social Security Administration (SSA) to base their retirement benefit on. As you’re planning for retirement, request a statement from the SSA to get a sense of what you can expect in retirement.

Coordinating how your Social Security, retirement savings and business strategy work together is all important to increasing your net worth and planning for retirement.

Chapter 6

Maintaining Your Lifestyle in Retirement 

Perhaps the greatest challenge to a high-net-worth retirement is figuring out how you’ll maintain your lifestyle when you’re no longer bringing home a paycheck. Your success has likely enabled you to live a larger lifestyle than the average individual. While this comes with above average benefits, it also likely comes with higher than average costs. How will your retirement portfolio provide the income necessary to provide for your lifestyle?

The first step to ensuring you can maintain your lifestyle in retirement is having a clear vision for what that lifestyle will look like. How will you spend your time in retirement? Knowing how you want to spend your days will help you determine how much your retirement lifestyle will cost. From there, you can strategize where your retirement income is going to come from.

As you create your retirement plan, don’t forget to account for the potential threats to a high-net-worth retirement that we discussed here. Each of the above risks should be addressed in your retirement plan. How will you plan for taxes? What strategies can you use to minimize the bite taxes take out of your retirement savings? How are you going to ensure your portfolio at least keeps up with inflation while mitigating the risk of market volatility? Last but not least, don’t forget to incorporate enough of a cushion into your financial plan that you can provide your loved ones any financial and emotional support you wish to give.

Retirement is about living your best life, the life you’ve worked decades to enjoy. Don’t let these threats derail your retirement dreams.

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If you’re ready to seek guidance from a financial advisor in Utah, contact the Rock House Financial Team. We’re here to help.